Germany’s Two-Class Pension System

On 1 July 2023, some 33 years after German reunification, pensions finally began be calculated the same way in East and West Germany. From now on, Germany has a uniform pension value (Rentenwert, used to calculate pension levels in the German pension system)  of 37.60 euro. Nonetheless, East–West pension alignment is a complicated, decades-long reunification process that is still ongoing.

Over 30 years ago, the introduction of a common German pension insurance system was celebrated as a “major socio-political achievement”. On 18 May 1990, the day on which the treaty establishing a German economic, monetary, and social union was signed, transferring the West German social security and legal systems onto the former German Democratic Republic (GDR), then-Chancellor Helmut Kohl of the Christian Democrats (CDU) declared that “I can say to the Germans in the GDR what Premier de Maizère also emphasized: no one will be worse off than before — and many will be better off”.

Yet in the three decades that followed, no socio-political issue has caused as much persistent frustration and resentment among East Germans as pensions, be it with respect to the debates over unequal pension levels in East and West Germany, higher taxation of pensions in the newly established German federal states in the East, GDR supplementary pensions not being recognized and therefore not being paid out, or poverty that women have suffered in old age due to the elimination of certain elements of GDR pensions that had taken their needs into account.

Pension Taxes in the New Federal States: Fair or Unfair?

In April 2023, Die Linke MP Sören Pellmann inquired with Germany’s Federal Ministry of Finance as to how much pensioners have to pay in taxes in the East and the West. In its response, the German government referred to the regulations for calculating taxes on old-age pensions. Upon retiring, a certain fixed proportion of each pension is tax-exempt, with this figure remaining constant for life. The rest is taxed.

Because East German pension amounts have, thus far, always been lower than those of West Germany, however, the tax-exempt amounts are lower and therefore the taxed proportion higher. For instance, anyone who retired in 2010 and draws a standard pension pays 217 euro in income tax in the East. In the West, it is 128 euro.

The new, nationally uniform pension value was supposed to put an end to this tax discrepancy. However, it does not apply to certain retirees because pensions have increased in East Germany by 5.86 percent, which is higher than the West’s increase of 4.39 percent. As a result, pensions in the East have had to be taxed at a higher rate.

Johannes Geyer of the German Institute for Economic Research (DIW) put this in clearer terms in a comment to public broadcaster MDR in April 2023. He explained that, over time, less overall had to be paid in taxes in East Germany: “workers’ pension contributions increased beyond the factor at which they were converted. That always put wages roughly on par with the West. And that surcharge wasn’t taxable.”

As acting head of the Public Economics Department at DIW Berlin, Geyer has spent years watching trends in post-reunification pension levels in East Germany. He describes the topic as virulent and points out that many people in the East do not feel that things are going well for them. Nonetheless, Geyer has been saying for years in interviews and articles that most East Germans have generally benefitted from reunification, particularly pensioners. That is not just some rose-tinted view of the past.

Representatives in the GDR’s tenth parliament, the Volkskammer — which was still engrossed in the consequences of the pension alignment law in the days leading up to the currency union going into effect on 1 July 1990 — also saw advantages in it. On 21 June 1990, Regine Hildebrandt of the Social Democratic Party (SPD), who was Labour and Social Policy Minister at the time, gave a speech to the Volkskammer in which she suggested that pension alignment with the GDR would have a positive effect on the West German pension system, and the pension increases would be “considerable, in some cases”.

Economic, Monetary, and Social Union

Discussions about the monetary, economic, and social union were already taking place before the first Volkskammer elections in March 1990. Around 2,000 East Germans left the GDR for the West each day in January of that year, and even after the Volkskammer elections, that figure was still almost 5,000 per week. For West Germany, that immigration wave meant a large financial and social burden, leading Helmut Kohl to plead for an economic reconstruction of East Germany that would quickly make a lasting improvement to living conditions there.

The West German government wanted to use the monetary union to persuade people in the GDR to stay where they were. Many East Germans demanded not only national unity, but also a strong Deutschmark. For that reason, wages, salaries, grants, the costs of renting and leasing, and pensions, as well as other recurring support payments, such as subsistence allowances, were converted at a 1:1 ratio.

But that created a problem for pensions. An actual one-to-one conversion was impossible, because the average pension in the GDR was 445 East German marks in 1989, but 1,465 Deutschmarks in the West. Reorganizing pensions on a one-to-one basis would have meant a difference of almost 1,000 marks. A revaluation based on a 40 percent wage level relative to West Germany boosted the value of pensions and wages. It meant that GDR retirees with a higher average income of 960 marks received around 670 marks instead of 445 marks.

Thus, pensions went up in the 1990s for about two thirds of GDR pensioners. Because of this strictly defined “Eastern pension value”, the average pension/salary ratio in East Germany was brought in line with the West German level. However, DIW expert Johannes Geyer believes that it would be hard to describe the merger of Eastern and Western pension systems as a “major socio-political achievement”. There was no alternative at all, he says. “Reunification simply required it. But the way they handled it and made their calculations was, at the time, far too optimistic”.

Divided Pensions after 1990

The origins of that optimism lie in the run-up to German unification. The time pressure made it impossible to resolve every major socio-political detail during the reunification process. It was already clear prior to official reunification on 3 October 1990 that pensions would be a balancing act that would need a lot of time. The politicians in charge were tasked with merging the pension systems of two nation-states whose social and economic policies had developed completely separately for 40 years.

The question of which socio-political regulations were to apply in future in the unified Federal Republic of Germany concerned Volkskammer representatives just as much as West German politicians. Were the GDR’s “social achievements” — the right to work, greater employment protection, a minimum pension, and generally more women-friendly social and pension policies — to serve as a foundation, or would pensions lean more toward the West German system, with its performance-based, variable provisions for old age? Or perhaps a combination of the two?

Approximately 300,000 women draw net pensions of 800 euro per month or less as of 2023. These elderly women have to officially apply for benefits or basic income support.

As Gerhard A. Ritter writes, in “the Federal Republic of Germany’s initial 7 February 1990 proposal of a ‘monetary union with economic reforms’”, there were no provisions for any kind of social union. Some people feared that such an agreement would make the economic transformation process more difficult in the East, although both GDR leaders and “key figures in West Germany” rejected that scenario.

Norbert Blüm of the CDU, the West German Minister of Labour and Social Affairs, opposed the reorganization that GDR representatives preferred, including the previously mentioned socio-political achievements, by proposing a “transfer of the West German welfare state that is as seamless and complete as possible”. Consequently, “the idea of mixing the two systems and adopting some of the many positive elements of the East German social system in a new, shared social state was rejected”.

However, that was also based on the assumption that living conditions between East and West would be aligned within five years following reunification. Chancellor Kohl was not the only one who promised “blooming landscapes”. Norbert Blüm also thought it was urgently necessary to fortify every economic and social policy area of the Eastern states. Otherwise, “reunification would happen by emigration from East to West and the wall would have to go back up to stop it”.

East Germany’s Patchwork Pensions

One consequence of this false assumption and the time pressure that developed between the start of the monetary union and the unification treaty was that it disadvantaged people with claims to a GDR supplementary pension — a problem that has endured to the present day. These supplementary pensions were introduced in 1951 after many scientists turned away from the GDR and moved to West Germany, primarily because wages in the GDR were very low and could not be increased due to the poor overall economic situation, reparation payments, and the Soviet project — continuing until 1953 or 1954 — of dismantling parts of the German economy.

Intellectuals, however, were more urgently needed than ever to construct the “workers’ and peasants’ state”. That is why then-chairman of the State Council Walter Ulbricht advocated especially for “leading members of the intelligentsia to be funded … with a supplementary pension”. The supplementary pension promised that 90 percent of the person’s average net wage would be drawn as a pension after retirement. This was designed to foster a stronger commitment to their jobs as well as an economic incentive.

On 17 August 1950, the government of the GDR passed a law establishing its first supplementary pension system: the Ordinance on the Supplementary Pension for Technical Intelligentsia (Verordnung über die zusätzliche Altersversorgung der technischen Intelligenz, or VO-AVItech). Over time, more and more professional groups gradually established their own supplementary pension systems.

For instance, the GDR government considered it necessary to establish a pension for doctors in the late 1950s, given the permeability of the country’s borders and the fact that doctors were emigrating in significant numbers. In the years that followed, supplementary pensions were also introduced for workers in artistic, educational, and medical institutions, as well as for academics. Special provisions for employees of the Ministry for State Security (MfS, better known as the Stasi), customs administration, fire departments, the National People’s Army (NVA), the People’s Police (Volkspolizei), and the penal system were only established in the 1970s.

By 1990, there were more than 160 different supplementary and special pension systems.

Dealing with the high salaries of these latter groups created major problems when the 1991 pension reconciliation bill was being drafted. By the time the monetary union went into effect, the Volkskammer had decided “to limit pensions from pension programmes that are close to the system, do away with unjustified payments, and dismantle inflated old-age pensions”.

However, there was no clearer definition of who was, or was not, “close to the system”. It did clearly mean workers within the narrowly defined state apparatus — but then, everyone who was either receiving or expecting to receive supplementary pensions soon came to be identified as close to the state and loyal to the system. This way of thinking sometimes persists even to the present day.

Dierk Hoffmann, the acting head of the Berlin department of the Leibniz Institute for Contemporary History Munich/Berlin (IfZ), has been researching GDR supplementary pensions for years, and says that, “from the perspective of Socialist Unity Party (SED) leaders, introducing supplementary pension systems was supposed to generate political loyalty. People were supposed to be bound to the state over the long term. Who belonged to that and who didn’t was decided by the SED government.” Neither the democratically elected Volkskammer representatives nor the agents of the Federal Republic of Germany wanted to endorse or reward anything that had been too close to the GDR state apparatus.

Even before accession to a unified Germany, the tenth Volkskammer had decided that people who were close to the system should not be rewarded with generous pensions. It passed the Law Abolishing the Pension Scheme of the Former Ministry for State Security/Office for National Security. The pension level for full-time Stasi and national security employees was to be brought in line with the rest of the population of the GDR.

The Volkskammer representatives also decided to dissolve all pension systems of that kind from the GDR era. Starting on 1 July 1990, new claims to, or applications for, such pension schemes would no longer be accepted.

The Pension Reconciliation Act and its Discontents

During the negotiations around the unification treaty, neither East nor West German politicians could come to terms with how the GDR supplementary pensions should be handled. Prior to reunification on 3 October 1990, they therefore agreed that the pensions in the new federal states would continue to be paid in accordance with GDR law until a definitive resolution was reached. Anything beyond that was to be regulated by legislators through a nationwide law. That came about with the Pension Reconciliation Act (Rentenüberleitungsgesetz, or RÜG) of 25 July 1991, which included the Claims and Entitlements Conveyance Act (Anspruchs- und Anwartschaftsüberführungsgesetz, or AAÜG).

Under the terms of the Pension Reconciliation Act, two pensions were to be calculated provisionally from 1992 to 1996 (one according to West German law, one according to East German law), and whichever was higher was to be paid in each case. Additionally, the Entitlements Conveyance Act provided for the shutdown of the supplementary and special pension systems for new pensioners, as well as the payment of supplementary pensions until the cut-off date of 30 June 1995. In the process, payments from the supplementary pension systems for state employees, people with management positions in the industrial sector, company presidents, heads of GDR conglomerates, and employees of social organizations and the Sport and Technology Association were capped at 2,010 Deutschmarks. Payments from the special pension systems were limited to a maximum of 990 Deutschmarks.

Pension figures are not a valid reflection of quality of life.

When the Pension Reconciliation Act came into force, and with it the provisions for cut-off dates in the mid-1990s, 27 groups of professions and people were disadvantaged, a situation that continues into the present. Each group sued, with some lawsuits spanning several decades, and ten of them reached settlements.

To the annoyance of many, those seeking payments from the special pension systems won their case due to a difference between their pensions and the supplementary pensions on one point: they had been paying 10 percent of their wages into a pension fund from the outset. Consequently, they were covered under Section 14 of Germany’s Basic Law, which designates pensions as property.

By contrast, contributions to supplementary pensions were not paid by the people affected. Why not? Wages in the GDR were so low that deductions would have been impossible. That is why these pensions were introduced in the first place.

To this day, 17 groups — including railway and postal workers, miners, and nurses — are still fighting for approval of their GDR supplementary pensions. They argue for recognition of their “Gelebte Praxis” — work that, despite technically not paying into a pension fund, might in practical terms be considered equivalent.

From the mid-1990s until the late 2000s, they brought lawsuits before state-level labour and social welfare courts as well as Germany’s Federal Social Court. That court decided what could be ruled on with respect to the legal possibilities (RÜG/AAÜG), and everything else went on to the Federal Constitutional Court. It too ruled within the predefined statutory framework. All other suits and grievances were rejected or not ruled on.

Instead, the Federal Constitutional Court pointed out the urgent need for legislators to create a legal framework in which the courts could take action. The Pension Reconciliation Act had to be corrected several times. After it was amended again in 2001, a legislator wrote that, “in order to avoid another round of ideologically motivated debates … [he] categorically would not go beyond the guidelines of the Federal Constitutional Court, nor comply with all of its demands”.

With every judicial means exhausted, just over 500,000 affected people have tried a political approach as of this year. In 2018, a coalition agreement between the Christian Union parties (CDU/CSU) and the SPD established a political solution in the form of a hardship fund under basic income support.

Pensioners were outraged, so a compromise was attempted in late autumn 2019: a one-off payment of 15,000 to 20,000 euro would be made to each person. But a year later, the Federal Ministry of Labour and Social Affairs declared that it would revert to a strict reading of the coalition agreement and arrange for a resolution oriented around the basic income support.

Pensioners have been able to file claims since March 2023. Anyone who receives a pension that is lower than 830 euro can apply for a one-off payment of at least 2,500 euro from a specially established foundation via the German government’s website. However, the 500-million-euro hardship fund is only intended for people who are currently at the poverty line due to changes in pension law during reunification.

If the new federal states pay into the fund, the amount paid out could increase. Thus far, only Mecklenburg-Western Pomerania has asserted its willingness to contribute, but debates are still ongoing in the state governments of all the other (new) states.

East German Women’s Double Burden

One group is affected particularly badly by poverty in old age: women who were divorced in the GDR. Approximately 300,000 women draw net pensions of 800 euro per month or less as of 2023. These elderly women have to officially apply for benefits or basic income support.

Some 33 years ago, politicians foresaw that it was essentially older women — divorced or not — whose pensions would be hit hardest. In 1990, Marianne Birthler, spokeswoman for Bündnis 90, an East German political movement that merged with the German Green Party in 1993, pointed out that the proposed alignment of existing pensions at West Germany’s net pension level would mean that 80–90 percent of women from the GDR would receive a minimum pension. They would therefore be excluded from flexibilization because the minimum pension is linked to benefits. Whoever was poor would stay poor, Birthler said.

Moreover, after reunification, two additional complicating factors arose for women who had been divorced in the GDR. One was the lack of alimony after a divorce. Alimony had been introduced in West Germany on 1 July 1977. Starting then, the “First Law on the Reform of Marriage and Family Law” acknowledged pension rights acquired in marriage on a partnership basis. That was a first, given that divorces had previously been on an “at-fault” basis and “post-marital liability for support could only be imposed on a marital partner who was found to be at fault”.

While many East Germans have materially benefitted from reunification, pensions remain a symbol of disappointment and broken promises.

There was no such thing as alimony in the GDR because the situation for divorced women was fundamentally different from those in West Germany. The “Consequences of Divorce Act” assumed that obligations resulting from a marriage had ended and there was no solidarity between the ex-partners. As of 1989, 92 percent of women were in the labour force, so employed women made a decent living.

Alimony was also introduced in East Germany as well on 1 January 1992, but the unification treaty specified that there would be no provision for (retroactive) alimony for women divorced in the new German federal states before 1992. Moreover, that only applied to women. For divorced men, the proportion of the money their ex-wives had received through care and reproductive work in the GDR would go into those men’s pensions without any additional deductions.

The Pension Reconciliation Act provision safeguarding existing standards and the provision stipulating that the higher pension had to be paid until 1996 meant that 83 percent of the women who were divorced in the GDR received a sufficient pension based on their many years of labour. This portion of the GDR pension, which was higher than the West German pensions paid after 1991, was called the “top-up amount”. This was “reduced by a fifth with each pension adjustment … but at least by 20 Deutschmarks; [whereby] the pension payment amount must not be less than the reduction”. That means that every pension increase was offset against the top-up amount.

After flexibilization started in 1996, that meant that the pensions of the East German pensioners who were affected would remain the same over time. This procedure affected upwards of 2 million former East German citizens, both men and women.

A Symbol of Broken Promises

The “seamless transfer of the West German welfare state” that Blüm demanded also did away with the “women-friendly” elements of the GDR pension system, including creditable additional years for children and paid employment, the allowance for training periods, and part-time employment after the provision to safeguard existing standards expired in 1996. These were added to pensions according to the average rate of earnings over the last 20 years of paid work.

This also changed after reunification: now it was no longer the last 20 years that counted, but rather all years of paid work. That once again led to a significant reduction in pensions, particularly for divorced women. That is because women in East Germany often worked more and longer hours during the two decades prior to retirement than they had previously, because that is when their children had left home.

On 21 June 1991, in order to avoid both the discrimination associated with these regulations and looming poverty among older people, the German parliament resolved to postpone a pension reform until 1997 and add the pro-women elements of the GDR pension system to post-reunification law then. At the time, the CDU/CSU, SPD, and Free Democratic Party (FDP) proposed that “the time between now and the expiration of the provisions to safeguard existing standards must be used … to expand women’s access and rights to pensions and make an important contribution toward solving the problem of poverty in old age”.

That law never got off the ground.

In 1997, several women filed a complaint with the Federal Constitutional Court regarding discrimination in pension policy. They were unsuccessful. In 2011, they addressed the UN’s Committee on the Elimination of Discrimination against Women (CEDAW). The Committee recommended that Germany establish a state-run compensation fund that it could use to increase pensions for women who were divorced in the GDR. Those UN standards are binding for the German government and so they, at least to some extent, will be implemented via the hardship fund.

Although the value of pensions for East and West Germans have finally been balanced, East German pensioners still have a few disadvantages that began with reunification. The boom that Kohl and Blüm assumed and promised would happen in the East within five years of German unification never materialized. As a result, neither wages nor pensions in the East caught up with the West in the allotted time frame.

Thus, while many East Germans have materially benefitted from reunification, pensions remain a symbol of disappointment and broken promises. Pension figures are not a valid reflection of quality of life.